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How High Will Interest Rates Go?
Today we are going to update you on the latest interest rate news. The news that will affect the greatest number of our listeners is that the 30-year mortgage rate is hovering right around 7%. That’s right, I said 7%. Many of those listening will have secured mortgage rates in the 2’s or 3’s. Well, it is double or more than that now, and sits at its highest level in over 15 years. This is definitely having an effect on the housing market. Assuming that someone puts 20% down, this rise in rates could raise their mortgage payment up 40% from where it was at the beginning of the year. To put that in dollar terms, if you had a $1000 mortgage payment, but needed to move and finance at today’s rates, it could raise your payment to $1400. Now some people can and will stomach this increase in rates, while others won’t. Here are some implications of higher mortgage rates
-Rental demand is likely to increase. If you are a landlord and your rent is competitive, you will likely have a line of people waiting to rent your home. You will probably also have the prerogative of raising rent to match what is going on in the market. Rents are going to be increasing.
-Longer term, the stigma of renting will lessen. Renting sometimes gets a bad rep – but it can be a really smart move for some. Renting has several advantages. First of all, you don’t have to pay for taxes or insurance. In certain areas, that can save you a lot of money. Renters also don’t have to cover repairs. If a renter has a good landlord that actually fixes things, then renting can lead to more peace of mind and less exposure to large repairs that can sink savings. In larger urban areas in particular, more people will be renting than ever before.
-Current Homeowners will be slower to move. If you have a great rate on your mortgage, you may think twice about moving and dealing with an increase on your home price. With fewer homes turning over, supply is likely to remain tight. This tight market could persist even though there are lots of unsold new homes under construction that will be hitting the market in the next year.
Now it is not just mortgage rates that are going up, but also the prime rate, which affects the rate at which businesses are able to borrow money. After sitting at 3.25% for years, the rate now sits at 6.25%, courtesy of the Fed’s Open market operations. This means that businesses that are looking to expand will have to pay more for credit to do it. It also means that existing debt that renews in the near future, could renew at a much higher rate. Here are a few implications of a higher prime rate:
-Businesses that are highly leveraged are going to get squeezed. We’ve been encouraging small businesses to reduce their debt over the last two years while times have been good. The less reliant you are on debt, the less exposed you will be as interest rates go up. Warren Buffett has a saying that “When the tide goes out you discover who’s been swimming naked.” Well, as interest rates continue to march upward, we’re likely to see some businesses exposed as having too much debt on their books.
-CD rates are starting to go back up. This is good news for savers. After making almost nothing for years, CD rates are likely to increase if the Fed keeps going higher on rates.
-The economy is going to slow and will likely experience a recession of some sort. I’ve been saying since the beginning of the year that we will likely experience a recession in 2023. I answered the question in our last episode of “Are we in a recession now.” My answer was no, but I do believe it is still coming. The question remains whether it will be a mild job-full recession, or an extremely painful one. The answer probably lies in whether higher rates are taming inflation.
So how high are interest rates likely to go? We’re all guessing, at this point, but the Fed anticipates the Prime rate rising to 7.5 to 8%. It is currently their plan, once they reach that level at the beginning of next year, to stop there for a time to let those rates continue to work themselves through the economy. But we have to take Fed plans with a grain of salt – because those plans are based on what they know today. Rates could go even higher if inflation remains stubborn. So what can we do when none of us know what interest rates are going to do?
Consider running a few scenarios that are very different from one another, and see what your plan would be in those instances. First consider rates going to 10%. That sounds pretty crazy right now, but it is possible. Could your business survive? What things would you change with interest rates at that level? Now consider that the prime rates goes up to 8% and then comes back down the next year to 5%. What adjustments would you need to make in an environment like that? Lastly consider a scenario where the Fed does exactly what it expects – the Prime rate goes up to 7.5%, sits there for a time and then starts to come back down gradually. We don’t know which of these three scenarios will play out – but if you have thought through a rough plan in each of them, you won’t be caught with no swimsuit on when the tide rolls out.
At MBC/Foundation Bank we love offering more than money to our clients. We love offering perspective and advice. It is our goal that our clients are equipped with more information so they can make better business decisions. Is your bank providing you that kind of value? If not, we encourage you to learn more about us by visiting our website at Foundationbank.org. If you’ve found this podcast helpful, we invite you to share it with your friends and family on social media and subscribe on your favorite podcast app. And until next time, God bless you. -President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on September 30, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.